Resolving Debt Crises: An Historical Perspective

Two general approaches have been offered for dealing with the developing country debt crisis: the first proposes continued reliance on case-by-case negotiation, while the second involves global plans for fundamentally restructuring the terms of international lending and repayment. Both approaches have precedents in earlier periods. In the 1930s, for instance, when some two-thirds of foreign dollar bonds lapsed into default, several global schemes for resolving the crisis were under consideration even while individual debtor-creditor negotiations were in progress. In the end no global plan was adopted and the debt crisis of the 1930s was resolved by the `muddling-through' approach of case-by-case negotiation. The experience of the 1930s suggests two questions concerning the efficacy of the two approaches. First, what stumbling blocks stand in the way of the adoption of global schemes? Second, as a crisis drags on, how does the evolution of debtor and creditor strategies permit it to be resolved through bilateral negotiations? In this paper historical evidence from the interwar period is used to address these questions.